Ottawa is so concerned about Canada’s booming housing market that it is considering further changes at Canada Mortgage and Housing Corp.

Just a day after the federal government tabled legislation that would place the mortgage insurer under stricter oversight, Finance Minister Jim Flaherty said that governance changes at CMHC are not out of the question.

The Canada Mortgage and Housing Corporation complex in Ottawa on Thursday Oct. 9, 2008.
Sean Kilpatrick for Globe and Mail

And he is particularly troubled by Toronto’s condo market. Mr. Flaherty said developers appear to be willing to build new units until sales dry up, which could lead to a crash. He is concerned that buyers who enter the market just before the music stops could get burned.

“I do worry about the last person buying a condo in Toronto, and people getting caught,” Mr. Flaherty said.

Anxiety over real estate was heightened by the recent lending practices of Canadian banks, which bore a troubling resemblance to those that caused the U.S. mortgage crisis, Mr. Flaherty said. He said he had conversations with individual bank CEOs to tell them that ultra-low mortgage rates were irresponsible.

While he does not rule out decreasing the maximum length of insured mortgages or raising the minimum down-payment in the future, he said he is balancing the need to keep the housing market in check with the need to keep the construction industry humming. More than 1.2-million Canadians work in that industry, according to Statistics Canada.

But a “remarkable” number of condos are being built and little thought is being given to the bigger picture, he said.

“I also talk to developers, and I hear from some of them who are in the business of building condos that they don’t really have a plan, they’re just going to keep building them until people stop buying them. It’s not exactly a fiscal plan,” he said. “It will lead to a crash.”

This week’s budget bill places CMHC under the watchful eyes of the country’s banking and insurance regulator, and expands the Crown corporation’s mandate – which is to help as many Canadians as possible buy homes – to ensure that its decisions contribute to the soundness of the broader economy. The organization is still responsible for social housing initiatives as well as its broader insurance and securities businesses.

“We’re doing these reforms now, we’ll see how it works,” Mr. Flaherty said.

Ottawa has already spent time examining CMHC’s books and testing its risks, and the banking regulator will now begin looking in detail at its mortgage-backed bonds business. “We have a fair amount of information about what’s there, so give us another year or so: I think we’ll have even a better handle on CMHC from a securitization point of view,” Mr. Flaherty said.

He acknowledged that changes to CMHC’s directors are probable, to bolster the amount of financial industry experience on the board. “I think it’s likely, given the changes in governance and supervision, that there will be some changes in the board composition over time,” he said.

Earlier this year, banks dropped mortgage rates to record lows, making five-year, fixed-rate loans available for 2.99 per cent. Mr. Flaherty said he had a word with the CEOs about that.

“You should be cautious about your lending practices, because this is the type of practice that led to a mortgage crisis in the United States several years ago,” he said he told them. “So my expectation is that you will not compete to the bottom on interest rates, which is the direction they were going.”

Since then, he has seen signs that the banks’ rates are more prudent and they have also tightened their lending practices for condo buildings. Rather than simply looking at how many units have been presold, some banks are now analyzing who those buyers are, how many units they’re buying and where their money is coming from, Mr. Flaherty said.

He said he’s confident banks have abandoned the race to the bottom, and now characterizes housing risk in the country as “modest” as a result of actions that have been taken.

Jim Flaherty quoted with the Globe and Mail editorial board

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